Can Refinancing Reinvigorate the Recovery? Don't Expect Miracles from HARP Modifications

Today the FHFA announced changes to the HARP program intended to make it easier for borrowers with high loan-to-value (LTV) ratios to refinance their fixed-rate mortgages to take advantage of today's low interest rates. The new regulations, in effect through 2013, eliminate certain risk-based fees for borrowers who refinance into shorter-term mortgages and lower fees for other borrowers, remove the current 125% limit on the LTV ratio for fixed-rate mortgages backed by Fannie Mae and Freddie Mac, in many cases eliminate the need for new property assessments, and do away with certain warranties and representations of lenders.[1] To be eligible, borrowers must be current on their mortgage, with no late payments in the last six months and no more than one late payment within the last year. In addition, the existing mortgage must have been sold to Fannie or Freddie on or before May 31, 2009 and cannot have been previously refinanced under HARP.

The plan announced today shares many similarities with a stylized plan the effects of which were simulated by researchers at MIT and CBO and that we recently argued would have only a modest effect in stimulating the economy.[2] Moreover, a twist in today's announcement is that risk-based fees are entirely eliminated only for those borrowers shortening their fixed-rate mortgages. Consequently, there may be little change in those borrowers' monthly payments even at today's lower interest rate, and so there will not necessarily be much cash flow freed up to be spent on non-housing items.[3] Therefore, we view the new guidelines as aimed more at encouraging borrowers to rebuild balance sheets faster without reducing other expenditures than as a macroeconomic stimulus.

The FHFA suggests that HARP finances might double under the revised guidelines. Given the modest take-up rate on HARP so far, such a doubling could not provide a major stimulus.[4] This does not mean the modifications to the program are not worth pursuing; they are. Just don't expect macroeconomic miracles from them.

This is from a commentary that was published on October 24, 2011.

[1] Federal Housing Finance Agency, “FHFA, Fannie Mae and Freddie Mac Announce HARP Changes to Reach More Borrowers” (FHFA News Release, October 24, 2011).
[2] See “Can Refinancing Reinvigorate the Recovery?” Macroeconomic Advisers’ Macro Focus (Volume 6, Number 13; October 18, 2011).
[3] The FHFA press release underscores this point. “The lower interest rate may provide borrowers the opportunity to shorten the term of their mortgages without much change in their monthly payment and perhaps even a reduction in that payment.”
[4] Through August roughly 900,000 borrowers had refinanced through HARP. Another 900,000 would be only about one-thirtieth of the mortgages owned or guarantee by Fannie and Freddie.


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